Money Talks

jjmoneytalks Finance, Finance 101

What’s in a Net Worth and How do I use it?

How do you calculate your Net Worth? What does it mean? These are all questions we should be able to answer.

Net Worth is as simple as the equation: Assets – Liabilities = Net Worth

For many Net Worth is an expression of vanity, to others it is a symbol of progress. Personally, Net Worth to me provides a report card that I can track annually, and by summarizing my Net Worth in a Balance Sheet type manner also can help give a qualitative understanding.

Monthly Income Monthly Liabilities
     Active Income      Budget Expenses
     Passive Income
Personal Assets Personal Liabilities
     Savings      Outstanding Debt
     Investments
     Property

Net Worth

As you can see in the above “personal balance sheet,” I separate out current from long-term assets and liabilities. Where this differs from a corporate balance sheet is that instead of “Current” assets or liabilities, which would be within a 12-month period, I substituted it for monthly.

My reasoning for this is that it makes it much easier to perform in a quick manner. Could you do an entire year? Sure, but this exercise is to give a quick and reliable indicator of your personal financial management. The easier to perform, the more likely you are to continue doing it.

Let’s dive into each category required to calculate Net Worth?

Personal Assets

Assets can include anything that you may purchase, gain, make or have. Really anything of value can be an asset. For Net Worth purposes, I would classify an asset as something that has value and that you are or would be willing to part with. In terms of value, something that has a “liquid market” is preferred. For my assets, I do not include my couch, my socks, or many other possessions.

Things I include are savings, investments, rentals, cars, houses, etc. Whether to include your primary residence and/or daily driver cars are up to you; there isn’t a wrong way to do it. If you have taken out a loan for it, it might make sense to have it in there, or if you own it outright and may not be willing to part with either of them, you may not want to put it in there. The goal is to be consistent with how you measure so that you can track your progress with some degree of accuracy.

Monthly Income

Another class of an asset would be income. Overall there are two types considered, Active income and Passive income. Active income is what you get from your work at a job, from a business, or from an activity. Passive Income is what you get returned from previous business, activities, or investments in which you are not currently tied. When your Passive Income Exceeds your Monthly Liabilities, then you effectively could retire.

Personal Liabilities

The next category would be Liabilities. Personal Liabilities are mainly any outstanding debts that are owed. As discussed in other posts, there are several different thought processes on debt. Rather than politicize a “which is best” approach, I will only say, the more debt or higher degree of leverage, the riskier your financial situation is.

Monthly Expenses

Other than Personal Liabilities on the “personal balance sheet,” there is also Monthly Expenses. Typically, you should have a plan for any normal expenses and these should be a part of your budget. Other things within a given year that are larger purchases or events can be saved for separately. An example would be to set aside monthly installments to pay for special occasions such as Birthdays, Anniversaries, or Holidays.

Here is an example of the categories within my personal balance sheet:

Monthly Income Monthly Liabilities
     Active Income (Business Income)      Personal Budget Expenses
     Passive Income (Rental Income)      Rental Expenses
Personal Assets Personal Liabilities
     Savings/Checking Accounts      Personal Mortgage
     Investments      Rental Mortgages
     Retirement Accounts
     Vehicles
     Personal Homes
     Rental Properties

Net Worth

Over time the goal is to build passive income, savings, investments, and rental properties; In parallel, also to reduce personal liabilities. By reviewing this annually, or more often as needed, can assure you that you are being a good financial manager of your money.

jjmoneytalks Finance 101

Getting Started

Personal Finance. Where to start?

This is always a difficult question. I have had many friends and family ask this before. I feel bad to always retort their question with a question. Where are you at? By determining where you are at, you then can formulate a plan for the future. Your priorities will be different from mine, or someone that is entering retirement. If you are starting you need to develop all aspects of your finances. Whereas if you are going into retirement, you need to change your investment strategy to accommodate withdrawing if it isn’t set to do so.

Simple things like these is where I see most people mess up. Surprisingly, people who usually need the most help don’t know it because they are already doing well. People who aren’t doing well know they need help, because well, they aren’t doing well. So, wherever you are at let’s get started.

I want to lay out an approach and I will cover it in more depth in upcoming posts. This is just to provide a quick overview:

RECOGNIZE AND DECIDE

Don’t beat yourself up too bad. You need to decide that you are going to do it and do it. You can beat yourself up along the way, but, the first step is recognition and decision.

INCOME

Find out what you actually earn. Determine your income annually and monthly. Whether you are self-employed, an employee for someone else or retired, it doesn’t matter, you need to know what is coming into the checking account every month (or year if they are annual installments).

EXPENSES

Track your expenses. Go through the last couple of months and look at your checking, savings, and credit card (if you have them) statements. Determine the monthly amount of expenses and start to categorize those expenses.

BUDGET

Start with 100/0 spending/savings, then progress to 80/20, and then kill it and try and do 60/40. Why start with spending 100 percent and saving 0? As I said, depends on where you are. If you are at 120/-20, getting to 100/0 just stops the growth of debt. For many, that is a great place to start. Develop a “Macrobudget,” this is a budget with the major categories and is what I currently use. If you nitpick every single aspect of your budget you are less likely to follow it and give your self no wiggle room. See more on how to “Macrobudget” here.

INSURANCE

The next important aspect is insurance. This includes health, home or renters, car, and life. These are important to shift the risk and make someone else responsible for huge catastrophes you would be unable to afford. If you don’t have one already, a Certified Financial Planner (CFP) or Finance Professional licensed in these services can provide you with the assistance or products you need. MAKE SURE THE TYPES OF PRODUCTS YOU GET ARE SUITED TO YOU, NOT ONE SIZE FITS ALL.

SAVINGS

Starting out, I would recommend before anything else that you build up a one month of income as an emergency fund and work on slashing the expenses or upping the income to achieve 100/0 budget. After we get past the 100/0, now we can start thinking of building up the emergency savings and investing to build wealth.

BUILD WEALTH AND OTHER THINGS

After getting the foundation laid, this is where it gets fun. Setting goals and reaching new heights, dreaming and achieving those dreams. Everyone’s dreams and desires are different. So, set your dreams and goals and succeed.

jjmoneytalks Finance

How to make a Macro-Budget!

Do I spend more than I make in a given month? If you can’t immediately answer this question then you may possibly need to make a budget. If you already have a budget, you may need to revisit it to ensure your budget is realistic enough to live off of. From time to time you may want to just do this as an exercise, either to reset yourself or to plan for a lifestyle increase (e.g. buying a house, or moving into a larger one).

Income

The first step in creating a budget is to determine how large the budget can actually be. This will be based on how much we are making. When we get to step two, we will determine, do we need to make more (e.g. get another job) or are there things we can cut out to get within budget. This will improve our cash flow leading us to be able to save and invest.

Spending Habits

The second step in creating a budget is to find out how much you are actually spending. To do this I collect the last four to sixth months of banking, checking, and billing statements. Once I have these separated out into the different months, I categorize all of the charges and payments. The main categories that I would break these expenses into are Savings, Living Expenses, Food & Dining, Financial, Gifts & Donations, Education, Entertainment, Travel, Planned Expenses, and Everything Else.

Savings

Typically, most people are saving whatever is left if anything at all. If you have recurring balances or debt payments that are getting larger you may be spending more than you make and that is something that needs to be acknowledged NOW. Then go fix it by getting another job or by decreasing your expenses. If you already have excessive debt under control, then set a goal to save every month. A good way to ensure this happens, is by using an auto draft or an allotment before anything else is spent. Prioritize your savings above your spending. Once I started doing this, my savings dramatically increased and we (my family and I) “learned” to live off the rest.

Living Expenses

How much you should spend on living expenses can depend on many things such as on the size of your family, what city you live in, what kind of job you have, etc. The focus should not be on ideally where do you want to live (we will work towards that), but rather what can you afford while providing safety and security for you and your family. There have been times where I chose to live in an area that was more expensive at the detriment to how much a month I could save. This choice is always a balance on getting to future goals while providing for your family’s emotional or physical well-being.  Main thing to remember is where there is an increase in living expenses there is also an incremental increase in bills and utilities.

Food & Dining

This part of my budget has GROWN THE MOST. From when I was single and before I was married, to now being married and having four children, it is surprising how much more I spend now than 10 years ago. This is also the one I would recommend most people to pay attention to. In my experience, this is one of a few that can get out of control the quickest in a given month based on laziness or convenience. Going out to restaurants and ordering food in can almost cause this to double just because of a few days per month. For this reason I would recommend having groceries and dining out as subcategories of this budget. In doing so, you allow yourself the flexibility to go out while also setting responsible limits for yourself.

Auto

Whether you are buying or leasing, unless you have paid cash for the full amount, you have or have had an auto loan. This is one part of the Auto budget. Other costs to think of are annual taxes (registration fees), maintenance costs, and the most common gas. If you have an electric vehicle then this is a portion of your electric bill.

Other Areas

Other areas of the macro-budget with some examples can include (but are not limited to):

  • Financial – life insurance premiums, health insurance premiums, car insurance premiums, etc.
  • Gifts & Donations – tithing, giving to non-profit organizations, soup kitchens, or other causes.
  • Education – kids clubs, tuition, extra-curricular activities.
  • Entertainment – allowances, movies, theme parks, museums, or anything you would do for fun.
  • Travel – any planned travel for vacations or work, typically includes air or hotels.
  • Preplanned Expenses – Making sure that things don’t creep up on you is big. Celebrations that happen every year such as birthdays or holidays can be broken down over a couple of months and saved up for rather than throwing off an entire month’s budget. Essentially saving up for any large expenses before they happen.

Everything Else

ALWAYS plan for the unplannable. This might not make sense but the last category should always be a buffer category.  Let me explain. If you need cash, and use an ATM that is not your banks, you could experience an ATM fee. Buying an unexpected birthday gift for a child’s friend (that came up during the month rather than before) could be another. Really what we are doing is providing a buffer for what cannot be accounted for. This amount is different varying from person to person and can be larger or smaller as you go on and continue to refine your budget from month to month.

Once You Have A Plan, Stick to it!

Once you have a plan. Go back every could of months and refine the plan. If you want to be more detailed and will stick to it than do so. Sticking to a plan prevents us from overspending in months where we would receive a bonus or any other unexpected source of income. Most people who over spend one month will typically overspend the next month or two as they try and reign it back in. Every time you get a pay raise or want to increase your lifestyle, plan a new budget. Focus on Saving and keeping all your expenses reasonable. This plan is what will help us to achieve our longer-term goals.

jjmoneytalks Finance, Financial Planning

3 Tax Planning Lessons to Learn From and Apply For Next Year

Tax Season Comes and Goes: Learn How to not Dread it

Sometimes it is hard to imagine what other areas you could improve your finances. Many People are currently going through a time of realization with the new tax code, seeing how much their tax is, and how much of a refund they are actually getting or how much they may owe.

If you haven’t done your taxes, make sure you get all the documents you need organized first, and for most situations using simple software or a local tax preparation office can be a time saver to getting your taxes done. For more complicated situations, be sure to interview a couple of CPAs or tax professionals to find someone knowledgeable to help with your specific situation.

A Couple of Tips on How to Make Next Tax Season Not as Stressful

Get Organized and Create a File

Since you have just gone through this process, you are very familiar with what you need and what will be helpful to track throughout the year. Take those lessons that you have learned, and the frustrations that you shared and set a plan to help achieve a less stressful tax time next year. Here are a couple of tips.

The first, and probably most important tip, in your filing cabinet create a folder or file for the upcoming tax time. Though many of the forms you will need will be coming at the end of this year or beginning of next year, there are still some things that can be tax items. Whether you itemize or not, you want to ensure you keep records, of large purchases (sales tax), donations, or other deductible expenses such as childcare. Having a place to put these records throughout the year will save you from the headache of trying to find the amounts or documents during tax time.

Verify Your Withholding

Another good tip is to check your withholding. If you received a very large refund and don’t expect your income to change drastically, you may find going to your W-4 and changing your withholding with help you put more towards savings or retirement plans throughout the year.

If you want to keep getting a large refund, you can do that too, just plan on where to save or invest it and try not to spend it on things before you get it.

If you are expecting an increase in income, or a decrease in tax write offs than you may want to increase your withholding to ensure that you don’t owe a tax bill when tax time comes.

Check Against Last Year’s Taxes

The last tip, compare your tax return to last year’s. Most tax returns do not change drastically other than for a minor shift in income or tax deductible expenses. Comparing to last year’s tax return, will ensure you didn’t forget something like a tax deductible expense on a rental property or an interest statement from a bank. Using the same preparation method year after year can also help in this regard as well.

All in all, you shouldn’t dread tax time. With prior planning and proper preparation, you can make it become a non-event.

 

jjmoneytalks Finance, Finance 101, Saving and Investing

Is 3-6 Months of Expenses Savings Enough?

A Savings is a keystone in any good financial plan. Having one is good practice. How do you know if your s is right for you? Personal financial plans are personal, so ensure that you are building the foundation for you and not based solely on someone else.

Is Saving 3-6 Months of Expenses still valid?

Many advisors have a quick go to of saying, “Save 3-6 months of expenses.” That advice is better than nothing, however why do they say that? What assumptions should go into that?

I’ve heard this time and time again from almost every financial planner and speaker out there. Do they even know why they are saying this? Well I can not answer for them, but I want to dive into how much you should actually have as a savings. I also want to bring to light some instances in which may require a deviation from this norm.

Why Have a Savings?

First, lets understand why we save. We primarily have a savings as an account that can carry us through unexpected occurrences. Things that could be unexpected are: a loss of a job, disastrous event such as a natural disaster, or even just as something as a large expense such as auto repair.

Second, lets also differentiate that these savings are not investments. This money is what you want in a high yield savings account, short-term certificate of deposits (CDs) or the like; this way it is liquid within 15-30 days with no loss of principle.

So How Much do I need?

For those who are employed, they would do well having around 6-9 months of savings. This is to cover an event such as job loss. Looking for a new job can take anywhere from 2-8 months (based on current averages, and may vary depending on your field). To determine your need, research your field and look at what averages have been to get a new job.

For those with a very dependable job such as government workers or others that fit into this category, your income is more stable, and are not as subjected to private industry swings. Because of this, you may only need a 1-3 months of savings. If you have kids, or other special circumstances you may still want more than 3 months of savings.

For self-employed (including a contractor of freelance worker), others that may be in or entering retirement, or if you have a commission only job such as a realtor, then a larger savings may be needed. For these individuals your need might be anywhere from 6 months-24 months depending on income stability.

Not a One Size Fits All

So, as you can see there isn’t a one size fits all, and everyone should take into consideration their situation. Other things to consider is how much debt you have; with little or no debt, you may not need as much.

Should I use Expenses or Income?

If you operate off of a monthly budget and stick to it, your bills are very consistent than having “so many months of expenses” may work. Personally, it doesn’t matter whether you use income or expenses to determine how much you need to save.  By the time you are in a situation that would require a savings, you may not have scaled back to basic necessities. Second, and let’s be honest, many people don’t know how much their expenses are each month. They just know that they are living somewhat within their means. Whether or not that is the case, I find it very easy to use gross income. Most of the times you can find this number on your pay stub and then just multiply it by the number of months you determine you need.

Keep this as the Foundation of your Plan

Once you have a savings, you may be very tempted to “get smart” and try to invest it.

Hold on right there.

Remember this is a type of “insurance.” This ensures you have money when you need it. If anything, keep at least one month in your checking, and keep the rest in a high yield savings or money market account. This way, your money is at least keeping up with inflation (for the most part) and is easily transferred to your checking account when needed.

Lastly, stick with it, the goal is to build your savings to create a foundation as a stable footing in your financial plan. Once that is complete, you can continue on to invest and build wealth at ease.

jjmoneytalks Finance

Welcome to JJMoneyTalks

Today Marks a Milestone. Today JJMoneyTalks.com Launches!

This has been a learning curve for me to learn something new, however I believe it will bring a great deal to those you may need it. I appreciate all the support that I have received along the way.

What does JJMoneyTalks Stand For?

I want to promote financial literacy. Not just to know it but to understand it.

For the younger generations, I would like to inspire them to grow. I would like the next generation to be a generation of Entrepreneurs, Investors, and Hard workers. I don’t want them to have to worry about finances (which many Americans do on a daily basis).

For the older generations, I want to encourage you that it is not to late. You can still achieve your dreams as well. I want the older generations to be self sufficient, and not dependent on government programs.

I want all generations to be prosperous. I want all generations to be courteous and kind. I want all generations to succeed together.

How I intend to help get there…

I intend to promote as factually accurate information that I can. I do not intend to provide advice, suggestions or recommendations. Many of what I write is what I incorporate into my own practices. I intend to encourage people to develop their knowledge and make financial decisions on their own, or with the help of an adviser. I intend to help people blindly going through life with their finances. I intend to inspire, I intend to mentor, I intend to promote and build up people over all.

Which is best, Who is right, What is the best way?

There isn’t a best way, no one way is right for all situations. There are a couple of things that work for most, however, the one size fits all, generally forgets the human aspect. Do you believe in this method? No, well how do you intend to stick to it then?

Believe in what you do, and do what works for you, that is inline with what you believe. Then you will get to where you want to go.

So, Thank You, for joining me on this journey…